Fraud Tips Hit All-Time High

Employees are increasingly coming forward with suspicions, according to a new study.Sarah Johnson, CFO.com | USMarch 29, 2012

Reflecting an all-time high, internal tip lines collected a higher proportion of fraud-related tips during the most recent quarter, according to a new report.

The Network Inc. and BDO Consulting said that 21.6% of incidents reported during the fourth quarter in organizations' hotlines and other reporting mechanisms were related to fraud, including possible corruption, misuse of corporate assets, and accounting irregularities. That number reflects an all-time high since the companies began their quarterly index in 2005, according to Jimmy Lin, vice president of product management and product development at The Network, a governance, risk, and compliance consultancy. The rest of the tips include complaints about personnel and health and safety concerns.

For the fourth quarter of 2011, 6,816 of the tips made to more than 1,400 organizations were about incidents having to do with fraud, reflecting a 15.2% increase over Q4 2010. The organizations include public and private companies, nonprofits, and municipalities.

Part of the reason for the uptick may be a delay between when a fraud first occurs and when it is first uncovered. Most fraud takes two or three years to be discovered, Lin notes. Thus, for example, fraud tips made in the wake of the start of the financial crisis may have begun in late 2008.

Moreover, Lin says, employees in general are getting more training on how to spot fraud and may feel more compelled to report problems within their companies. They may be spurred to use hotlines when they see other businesses' reputations harmed by fraud — a more frequent occurrence with regulators increasing their enforcement activity under such laws as the Foreign Corrupt Practices Act. "The increasing number of fraud reports may actually be a good thing — that means everyone is more aware of the potential for fraud and more aware of what fraud looks like," Lin says.

Still, the increase does not necessarily mean that fraud is more rampant. The tally does not distinguish between real tips and suspicions that turn out to be false leads.

The latest tally could be attributed partly to new whistle-blower rules that have made companies eager to get employees to report internally before going to regulators. Acting in accordance with the Dodd-Frank Act, the Securities and Exchange Commission set up a cash-bounty program that rewards informants of securities-law violations with 10% to 30% of the penalties if the SEC makes an enforcement action worth at least $1 million. The program is viewed by some critics as prodding whistle-blowers to go to the regulator first instead of going to the company itself, but The Network's data may suggest otherwise.